Interview with Shardul Shroff: Next 90 days will see some form of action, there will be some revival plans or insolvency

Shardul Shroff, executive chairman of leading law firm Shardul Amarchand Mangaldas & Co, says banks will be able to recover money stuck in top corporate defaulters, something that has not happened over the years. In an interview to The Indian Express, Shroff, who represents lenders in the litigation, said buyers for the assets are waiting in the wings and banks will get to know the realisation — of course with haircuts and after long-drawn proceedings. Edited excerpts:

When will we see the first resolution plan under the Insolvency and Bankruptcy Code (IBC) 2016?

It should have happened by now because we started on December 1, 2016. Six months got over. Normally, in 6 months, some resolution plans should have fructified but I have not seen anything. People are still taking extensions, they want more time to draft etc. So, probably the next 90 days will lead to some form of action in the sense that there will be some revival plans or insolvency.

Do you think the new RBI circular which has deleted the statement that the 12 large defaulter cases should be given priority by NCLT, will slow the process under IBC?

No, because as of now, the pressure of work is less on the tribunal. Today, even without the RBI (the Reserve Bank of India) circular, we were getting dates within a week, sometimes twice a week. It is a new tribunal.
So, it’s not that they are overloaded with work. So, it will make no difference. You must have seen all the matters are coming up for admission.

Will banks now be able to recover debt from these defaulters?

They will get recovery because the banks will get valuation, which has not happened truly over years. Banks will now get to know what will the realisation value be. So, to that extent, you know if it’s to be sold what is the secured creditor going to get, what are the banks really going to get. So the shortfall calculation will be done.

If resolution doesn’t happen in the first several cases, won’t there be disenchantment with the process?

Look at it in a different way. If the instalment or the money that you pay is less than interest, then you are saying that I can’t even pay principal. So, those are going to be troublesome situations because the banks will have to take large haircuts and maybe, even the buyer will want incentives to step in. One leg is cutting down debt and the other is giving new facilities to the buyer because nobody has got this kind of liquidity to go and pick up a steel business.

Let’s say that after the 270 days, there is no option but to wind up a company. In the current market, will we be able to realise something?

My own feeling is that the global situation is such that not much can be done especially steel is in a glut. But according to the banks, they are getting buyers. For instance, Amtek has at least 20 bidders for different parts of its business. So, it depends on the sector I feel.

Are the banks in a position to take a big haircut?

They have no choice. They will have to do it because otherwise, they are facing 100 per cent write-off. They will have a hole in any case.

Are you seeing more debtors taking companies to NCLT rather than the banks?

Debtors are taking companies to NCLT but those are operational debtors. And, operational debtors are really not getting relief. Nobody is winding up a company because an operational debtor has moved court. Winding up process has effectively stalled because of trade loans. The fundamental change which has happened in the company law is that the 1956 Act had a provision that said inability to pay. That’s gone so, today neither under the insolvency Act nor under the old Companies Act do you have a provision for winding up for inability to pay. The differentiation which has now happened is that if you have got a non-performing asset then you have an eligibility to file in NCLT.

Do you see any fund diversion from the 12 defaulter firms?

There could be fund diversion. But as far as I know, all the cases have gone through forensic. There could be cases where there is diversion in that case they will sue the promoters. Sebi has taken it up seriously, the mismatch in NPAs and what is actually provided in the book. Sebi will do an enquiry which will be far more serious than what probably the RBI and banks will do. So, listed companies will be under the scanner.

With the new law in place, how much of it is a difference from a perspective of an investor now to come in as opposed to earlier?

Now, the asset debt mismatch will get rationalised. Because any fund that is going to come in will not come in on as-is basis. Everyone is going to ask for a haircut. And, they will therefore come out with what is the restructured balance sheet in some sense. There will be two theories — is it a good asset or a bad asset, is it a good management or a bad management. On these corners the theory will be tested.

In the background of the new law, there is a completely different wake-up call for Indian promoters. How will things change in coming years?

In a SDR or a S4A, the law now contemplates that the lenders convert part of their loan exposure in a stressed company into equity and own at least 51 per cent. By this, there is no money flow. It’s just an adjustment. But as a result of that, the promoters are getting squeezed out. This is certainly going to raise alarm bells with the original owners. It may drive them because this could result in a takeover.

Is there any ambiguity in terms of what is a disputed debt because two different benches of NCLT have defined it differently?

Every debt will be disputed. Let me put it why. Debt would be a balance sheet acknowledgment. Knowing how Indian promoters are, they will always say this is not due. But then the question will be compared with the balance sheet confirmation or the balance confirmation. So, there will be some amount of discovery as to what’s the debt due. What is important is that the tribunal, the NCLT or the resolution professional (RP) is not a judge. So, for him, he is not adjudicating the debt due. His job is to record that there is debt due not what is the debt due. The judging of the debt is only for the purpose of the vote.

Will firms challenge the NCLT order in the Supreme Court?

Who will not challenge it? And, I am glad that there will be challenges because there will be finality then. You must assume that this new law will be in suspense for 2 years because people who will lose their company will not take it lying down. So, people will challenge but I have a feeling that the SC will be against the heavy indebtedness.

Currently, is NCLT equipped to handle such cases?

They are. NCLTs and typically, the Company Law Board were always handling oppression and mismanagement. So, they already have that jurisprudence. For them, noticing mismanagement is not difficult.

But, building of resolution professionals will take time…

Yes, it will, because of many reasons. You tell me what can an individual RP do? If a company has 50 subsidiaries, how will an RP hold it in any case. Or he has got 10 locations, before an RP takes charge of those 10 locations and make an inventory statement, 270 days will be over. So, there will be some amount of flexibility that will be given. For an RP, making an information memorandum will be a herculean task because this is a merchant banking job. Because if you have an unwilling corporate, you will not get any data.

SBI chief Arundhati Bhattacharya earlier said that the ecosystem is not ready for this, what do you think?

I would agree with her. Because what is today ready? People are only appointing a receiver and sitting. So status quo has been maintained but the action which is required for a resolution plan, the detailing that is required , the drafting skill, we have not seen it yet. We have only scratched the surface of the law. We have not reached a position where we have seen a very good scheme being drafted. So it will take time.